SEC’s Asset Management Unit Focuses on Compliance Failures, Vol. 1
The SEC Enforcement Division’s Asset Management Unit has brought some substantial cases over the last year, including a number arising out of its Aberrational Performance Inquiry. Another focus for the unit has been compliance failures at registered investment advisers. On November 20th, the unit filed a pair of administrative cases addressing some of those failures. Today we’ll focus on the first of those. Later in the week we’ll address the second case, In re Evens Barthelemy and Barthelemy Group LLC, Admin. Proc. File No. 15102.
The Case
The case against the firm and its CEO began with a December 2010 information request from the SEC’s exam staff. The staff had requested books and records, some of which the firm produced in short order. The firm, though, withheld its financial statements and promised that they would be “provided in approximately three weeks.” These records were not actually produced within three weeks. In May 2011, when no financial statements were forthcoming, the exam staff broadened the scope of its exam and provided the CEO with an expanded list of document requests. The CEO produced some of the newly-requested materials but still did not furnish the 2009 or 2010 financial statements. The CEO also did not furnish emails and documents related to the firm’s management of one of its fund clients.
After some back-and-forth between the CEO and the exam staff, the SEC’s enforcement staff (in an unwelcome development for the firm) sent a document request for all outstanding items to the firm on July 27, 2011. As before, the CEO promised he would provide all of the requested information but did not fully comply. On May 29, 2012, enforcement staff sent the CEO a Wells notice indicating the staff intended to recommend enforcement action for these failures to provide required books and records. The CEO produced the last of the requested documents in September 2012.
Section 204 of the Investment Advisers Act of 1940 requires investment advisers to make and keep certain records and specifies that those records are subject to examination by SEC staff. Rule 204-2 provides that investment advisers must furnish copies of specific categories of books and records on request. The SEC’s order sanctions the firm for violating Section 204 and Rule 204-2, and the CEO for aiding and abetting those violations. The firm and the CEO were censured and ordered to pay a $20,000 civil money penalty no a joint and several basis.
Lessons from the Case
There might have been worse outcomes here. The case doesn’t reveal the firm or its advisory business to be a fraud. But when faced with intransigence on document productions like that described above, the SEC’s exam and enforcement staffs have to consider the possibility. And they’re a bit surprised when the ultimate outcome doesn’t look that way. Investment advisers around the country should take the opportunity to get their books and records in order now, before they’re under exam pressure and time is short. The firm eventually produced the required documents; doing so even remotely on time would have saved it $20,000, attorney’s fees for dealing with the enforcement staff, and the negative publicity from this action, which will endure.
More broadly, the action is a direct outgrowth of the Asset Management Unit’s very existence. Now when the exam staff faces resistance in its document collection efforts, they have an obvious place to call. The exam staff previously could have called anyone in Enforcement for help in threatening slow producers, but having a group of attorneys focused on regulating investment advisers makes the information exchange that much easier. The Unit itself is also incentivized to keep its own “block” clean. When the specialized units were created, I thought the resulting concentrated expertise would be the main benefit. I hadn’t considered that specialization would have these other, perhaps more mundane effects. But I think it does tend to encourage these kinds of compliance-based cases, and the division’s leadership obviously wants to see them.